Muddy Water

China’s national leadership transition could make things more complex when it comes to Cotai casino project permissions

Tuesday, 20 March 2012 12:12

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When a senior Macau official went on a recent visit to Beijing, he made an unusual request to China’s political leadership, according to some sources. The Macau official suggested that Beijing rather than Macau should draw up a strategic plan for Macau’s development.

If true, this tells investors almost everything they need to know about the way the territory is governed and what impact that is likely to have on the casino industry. In effect, the local official was sending several political messages. One was that Macau accepts its political subservience to Beijing, beyond even the junior partner relationship implied under Macau’s miniconstitution, The Basic Law. While Hong Kong has constitutionally-speaking broadly the same subsidiary relationship to the People’s Republic of China as Macau does, it would be politically impossible in terms of Hong Kong public opinion for that city’s leaders to importune the national government for guidance quite so openly.

Another message apparently being sent by Macau in its request for a ‘grand plan’ from head office is some degree of exasperation at having constantly to look over its shoulder and second guess what Beijing wants. Macau’s political leadership and civil service is less experienced at developing policy and its economy less diversified than that of its neighbour Hong Kong. Arguably, therefore, Macau might benefit from more guidance from the central government, or from having its development plan coordinated more closely with that of neighbouring Guangdong province—the source of around half of Macau’s annual visitors. That’s an important consideration because the casino industry and gambling in general are intensely political topics for China. Avoiding consumer excess in this area is closely tied to the wellbeing of the masses and the much-mentioned ‘social harmony’ and, thus, indirectly to the political survival of the Communist Party of China (CPC) itself.

This raises a third issue. What the central government ‘wants’ in China generally and Macau in particular is not always clear, and is likely to remain somewhat hazy for the coming months and possibly years. That’s because China is entering a period of transition in national leadership. President Hu Jintao and Premier Wen Jiabao will soon retire after a decade at the helm. The fact that both of them are regarded as reformminded on economic policy and that their tenure coincided with the ‘big bang’ of Macau gaming market liberalisation is no accident. Although political analysts specialising in China think they know what will happen after the new leaders come in (i.e. more of the same in terms of cautious incremental reform across the whole economy) and although the names of the expected new leaders have been widely reported, the reality is that the succession process isn’t over until it’s over. It can sometimes throw up surprises because of internal party power struggles not visible to the outside world. Successors are not usually formally announced in advance but instead ‘signalled’ to the wider world by small clues such as their position on a podium at an official event, or by being given licence to make a speech on a key topic at a politically important moment.

Slowly does itUntil the direction of the national leadership is clearly decided, it’s unlikely that the Macau government will do anything bold or decisive in terms of Macau gaming industry policy, for fear of alienating either of the central government factions currently competing for power. These factions in broad brush terms are the pro-market reformers and the more traditionalist pro-state ownership faction. The latter are thought to be less amenable to further expansion of (largely foreign-owned) commercial gambling than the former. Even when a political succession is actually in place in China, it’s likely to take time for the ‘winners’ to consolidate their position, gradually easing out their opponents within the central government and promoting their own supporters. At the time of the last leadership succession in 2002, it took around two years for the new leadership to consolidate its hold on power, according to political analysts.

This doesn’t mean it will be two years before the Macau government feels comfortable about giving a construction start date for any more casino projects on Cotai. But it does suggest that were any of the three operators currently waiting on approval for new Cotai projects—MGM China, SJM and Wynn; as well as the one operator (Melco Crown Entertainment) waiting for confirmation of the previously stalled Studio City project—to start vigorously lobbying the Macau government on the topic, they may simply be addressing their concerns to the wrong people at the wrong moment.

Wynn Resorts has been at pains to point out that a 3rd March filing to the New York Stock Exchange stating that Wynn had received ‘gazetting’ of its Cotai land concession contract by the Macau government (technically the final stage of approval before construction can go ahead) was actually a clerical error. Inside Asian Gaming has no reason to doubt that explanation. But even if one of the Cotai land applicants—possibly under pressure from shareholders and market makers—were minded to apply pressure to the Macau government, not only is it likely to be counterproductive as simply the ‘wrong’ way to go about business in China, but it might actually achieve the spectacular own goal of offending Chinese officialdom in general while addressing the wrong audience in particular.

Even assuming for a moment that the ‘big picture’ issue of when to allow further expansion of Macau’s gaming industry on Cotai is in the hands of Beijing rather than Macau, the concessionaires’ relationships with the territory’s government are still important and could have an influence on the timing of individual projects. Fewer than six months ago it seemed that Steve Wynn was a clear leader in the race to win hearts and minds in Macau, armed with undeniable personal charm and having learned quickly how to go about business in China. In the second half of 2011, Wynn Resorts announced a HK$1 billion (US$128.3 million) donation to the University of Macau Development Fund for its new campus on Hengqin island next door to Macau—to be spread over 11 years. While the donation was not itself a quid pro quo payment on the understanding of a Cotai approval, Mr Wynn and his board must have felt confident the goodwill created by such a gesture would smooth his path. But like the proverbial hare and tortoise race, Wynn’s apparent early lead now looks to have evaporated—partly through missteps and partly through circumstance.

It’s a truism of doing business in China that the less public noise you make in advance of a deal the better. In the Cotai approvals context, the recent falling out between Mr Wynn and his former business partner Kazuo Okada—apparently over how to deal with the issue of investment (or not) in the Philippines—is a veritable St Patrick’s Day Parade of publicity; brash, loud and as ugly as a red-haired leprechaun comedy wig. Going public with details of how much the wife of an official from the Philippine Amusement and Gaming Corporation reportedly spent on tick during a visit to Wynn Macau—while a guest of Mr Okada—may be considered a legitimate tactic by Wynn’s lawyers in its tussle with Mr Okada. But it is unlikely to endear either party to the Chinese authorities, where the powers and privileges of those in authority are rarely exposed to public scrutiny.

Old timesBack in 2008, during happier times, Mr Wynn was quoted as saying: “I love Kazuo Okada as much as any man that I’ve ever met in my life. He’s my partner and friend. And there is hardly anything I won’t do for him.” Times change. People change. But Chinese officials might be forgiven for wondering how exactly it will benefit them to be Mr Wynn’s friend in the current situation. Nor will it garner much sympathy among the public in Macau and China as a whole that two very rich men now feel hurt and betrayed by each other. Whether one views the dispute from the position of the public good or from the position of the investor, it’s hard to see a ‘victim’ in this situation. Despite Mr Okada’s complaint filed recently in a US District Court in Nevada about the “unjust and improper redemption of [Wynn] shares owned by Aruze USA, Inc., at a 30% discount”, a fact easily overlooked is that even at the discounted price, Mr Okada has tripled the value of his investment in Wynn during the time his money has been in the company. And by taking Mr Okada’s shares off the table and replacing that loss of equity capital by issuing bonds, Mr Wynn has also created more concentrated value for the remaining shareholders (including him).

Like two students fighting in the school yard during break—and in likelihood urged to action by their respective legal teams—it seems both Mr Wynn and Mr Okada have lost sight of the bigger picture. This is that no matter who wins the fight, it’s not going to help either of them graduate from the high school of Chinese public opinion. Ultimately, the difficulty may be that Western-focused investors in Asian casino markets have two very different groups of people to convince regarding their leadership skills—the folks back home, and the folks back here. The skills needed to address the two communities are very different. But when your core operation is listed in New York and regulated in Nevada rather than in Asia, then the temptation is always to please the home team first—even if it’s at the expense of alienating the very people who can make most money for you in the long run.

“Until the direction of the national leadershipis clearly decided, it’s unlikelythat the Macau government will do anythingbold or decisive in terms of Macau gamingindustry policy, for fear of alienating eitherof the central government factions currentlycompeting for power.”

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